CVA charges concentrated among top banks in Europe

Crédit Agricole, Deutsche Bank, Barclays, Commerzbank and Societe Generale account for 31% of total CVA across 135 banks

Just 20 banks out of 135 surveyed in the European Banking Authority’s (EBA) latest transparency exercise account for two-thirds of regulatory capital charged to cover credit valuation adjustments to non-cleared derivatives, Risk Quantum analysis shows. 

As of June 2020, aggregate CVA risk-weighted assets sample-wide totalled €73 billion ($89 billion) and made up 0.7% of the banks’ total RWAs. Risk-weighted assets are used to compute capital requirements.

Of this €73 billion, banks in Germany, France, the UK and Netherlands accounted for 71% of the total. Five banks – Crédit Agricole, Deutsche Bank, Barclays, Commerzbank and Societe Generale – accounted for 31% between them. Together, these banks produced 17% of total RWAs across the sample.

 

The ten banks with the most CVA RWAs made up 49% of the total and the top 20 66%. 

CVA RWAs made up just 0.4% of the median bank’s total RWAs. But 39 had CVA RWAs in excess of 1% of their respective totals. Five banks had CVA RWAs making up more than 8% of their totals – BNG Bank, SFIL, Kuntarahoitus Oyj, Nederlandse Waterschapsbank and Kommuninvest.

What is it?

The EU-wide transparency exercise discloses bank-by-bank data on capital positions, risk-weighted assets, leverage exposures and asset quality for 135 banks across 26 EU and European Economic Area (EEA) countries and the UK.

Why it matters

CVA charges are a hot topic among European policymakers in the run-up to Basel III. Today, EU banks benefit from special rules that mean they don’t have to hold CVA capital for corporate or pension fund clients. This carve-out may no longer apply once the Basel reforms are brought into effect, though regional politicians are fighting against this.

In a recent quantitative impact assessment, the EBA found that CVA would account for 2.1 percentage points of an overall 18.5% increase in total required minimum capital under Basel III. If the CVA exemption were to stay in place, though, this charge would contribute just 0.5pp to an overall 13.1% increase.

As the above data shows, big increases to CVA capital would likely be most felt by only a handful of banks – those in the top 20 that already account for the most CVA RWAs. However, the effect may also cramp firms like Sweden’s Kommuninvest and Finland’s Kuntarahoitus Oyj, for which CVA makes up a large chunk of their overall RWAs. Of course, the leap up in CVA at these banks may be temporary, another side effect of the coronavirus-induced market chaos of this year.

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